What happened
Shares of Gap Inc. (GPS +1.80%) were sliding today after JPMorgan Chase downgraded its rating on the apparel giant. As a result, Gap shares closed down 5.8%.
Image source: Gap.
So what
Analyst Matthew Boss downgraded the stock to underweight, and lowered his price rating on the retailer to $24 from $30. Boss critiqued the parent of Old Navy and Banana Republic on a number of points, saying that the company could face pressure from rising transportation costs, elevated wages, and tariffs. He also noted an assortment imbalance at Gap-brand stores, and said Amazon's decision to raise wages to $15 an hour as well as rising minimum wages in many states would pressure it on the cost side.
With the holidays right around the corner, he seemed to think the company's inventory challenges left it poorly positioned for the peak selling season.
Now what
Gap has long been a mixed bag for investors. Old Navy has thrived with few direct competitors, but the Gap brand and Banana Republic have struggled in recent years. Overall, companywide comparable sales are moving higher, up 2% in the most recent quarter, and have increased for seven straight quarters. And Gap should benefit from the strong economy and record consumer confidence.
However, Boss is justified in calling out the struggles of the Gap brand. Comps there fell 5% in the most recent quarter as the chain has lost relevance to fast-fashion brands like H&M and Uniqlo.
Shares of Gap hit a 52-week low on the news, and the stock looks cheap at a P/E of 11. Given that issues like wages, tariffs, and freight costs should affect its competitors equally, Boss' thesis might be exaggerated. The tailwinds from the economy should also help Gap's comps continue to grow, especially since plenty of its rivals continue to give up market share.
